Consortium for Economic Policy Research and Advice WCER Canadian Association Institute Working Academy International of Universities and for the Economy Center of National Development Colleges in Transition for Economic Economy Agency of Canada Reform Factors of Economic Growth in Russia’s Regions Moscow 2005 UDC 332.122(1-77)(470+571) LBC 65.049(2Рос)+65.9(2Рос)-96 F12 Factors of Economic Growth in Russia’s Regions. M.: IET, 2005. P. 268.

The monograph deals with analysis of the factors that determine the diversity in the degree and pace of economic development of Russia's regions. In particular, basing on the data of main socio-economic indicators of RF constituent regions' performance, the authors have empirically tested various convergence concepts and attempted to conduct decomposition of economic growth and assess the dynamics of labor productivity in Russia's regions. One of the sections of the monograph focuses on the Canadian record of development of individual regions and equalization policies. The monograph contains conclusions and recommendations for development of the federal economic policy with respect to different Russian regions.

The research and the publication were undertaken in the framework of CEPRA (Consortium for Economic Policy, Research and Advice) project funded by the Canadian Agency for International Development (CIDA).

ISBN 5–93255–180-1 5, Gazetny per., Moscow, 125993 Russia Tel. (495) 629–67–36, Fax (495) 203–88–16 E-mail – info@iet.ru, Web Site – http://www.iet.ru Contents Introduction........................................................................................ 1. Theoretical Fundamentals of Analysis of Regional Growth............................................................................ 1.1. Issues of Growth in the Theory of Regional Economy........................................................................ 1.1.1. Theory of Growth in Regional Economics....................... 1.1.2. Agglomerations Theory.................................................. 1.1.3. “Nucleus–Periphery” Models......................................... 1.1.4. The Random Growth Theory.......................................... 1.1.5. The Role of Innovations in Differences in Regional Growth.................................................................. 1.2. Issues of Regional Development in Russian Economic Literature........................................................................ 2. The Concept of Convergence and Its Application to the Evaluation of Economic Growth in the RF Regions........... 2.1. The Convergence Theory......................................................... 2.2. An Empirical Testing of Convergence Concepts in Respect to the RF Regions.......................................... 2.2.1. Comparative Analysis of the RF Regions by GRP over the Period between through 2002............................................................................. 2.2.2. Testing Hypothesis of –Convergence........................... 2.2.3. Testing the Concept of the Unconventional –convergence.......................................................................... 2.2.4. The Impact of Budget Policy on Convergence between Russia’s Regions:

Testing the Hypothesis of Conventional –convergence.......................................................................... Annex 1.............................................................................................. 3. Decomposition of Economic Growth in Russia’s Regions........................................................................... 3.1. Methodology and Data............................................................. 3.2. The Main Approach to Decomposition of Growth........................................................................................ 3.2.1. Assessing Output............................................................ 3.2.2. Assessing Labor Input.................................................. 3.2.3. Assessing Capital Input................................................ 3.2.4. Assessing Weight Coefficients to Integrate Inputs................................................................... 3.2.5. Decomposition of Growth............................................ 3.3. The Dual Approach to Decomposition of Growth................................................................................ 3.3.1. Comparing Assessments Made by Different Methods.............................................................. 3.4. Labor Productivity in the Industrial Sector............................ Annex 2............................................................................................ 4. Economic Growth in Regions. Relevant Canadian Experience..................................................................... 4.1. Capital Imports –Human and Financial................................. 4.2. Federal “National Policy”...................................................... 4.3. US-Focus – Reciprocity / Free Trade / Continentalism......... 4.4. Resource–based Growth: Extraction and Processing............. 4.5. Trade-based Growth............................................................... 4.6. Finance-based Growth........................................................... 4.7. Shifts from Region to Region................................................. 4.8. Focus on “Disparities”........................................................... 4.9. The Federal Spending Power: Scope and Limitations........... 4.10. A New Approach to Regional Development in Atlantic Canada......................................................................... 4.11. Infrastructure Grants and Agglomeration Economies.......... 4.12. Prospects of the Development of Atlantic Canada............... 5. Main Conclusions and Economic Policy Recommendations............................................................... Bibliography.................................................................................... Introduction The past five years starting from 1999 saw a rapid growth in Russia’s economy. At the time, in the aftermath of the 1998 crisis and the four-fold depreciation of the Ruble, import substitution processes in the domestic market have triggered the growth. Later a favorable state of affairs on external markets and the unfolding recovery growth of the economy supported the growth, while over the past two years it is the expansion of the domestic demand for all the spectrum of goods whose contribution to the GDP growth rates was increasing.

Whilst on the macrolevel the main factors of economic growth are more or less evident and, to some extent, studied into (see, for instance: Entov, Lugovoy at al. (2003)), there practically is no analysis of processes on the level of Russia’s single regions1. It is evident though, that both at the stage of transformational slump and the one of economic growth dynamics of main indicators that characterize regional economies appears very diverse. This causes a serious differentiation between the RF Subjects in terms of their well-being and economic development capacity. The differentiation intensifies because of differences between them in terms of climatic and natural conditions, abundance or scarcity with minerals, etc.

In the frame of CEPRA, there have been some papers that dealt with single issues directly associated with growth rates and its differentiation across the RF Subjects, albeit the present research does not focus on fundamental causes of these processes. More specifically, the paper “Typology of Russian Regions”2 presented a typol The review of papers on various aspects of regional development in RF is given in section 1.2.

Buts, Drobyshevsky at al.(2002).

ogy of the RF Subjects received on the basis of a qualitative analysis and combination of economic capacity, living standards and investment activity indices.

The paper entitled “Investment: the Regional Aspect”3 demonstrated that in 1992–2001 investment processes had been very different in different RF regions. The differences can be attributed both to then existing level of development of single industries and regions’ profiles under the Soviet planned economy and the geographical and sectoral structure of foreign investments. The latter found themselves under the impact of primarily the level of maturity of market relations in a given sector or Subject of RF, as well as other institutional and political factors.

The present project focuses on an analysis of factors that determine differences in the extent and rate of economic development of Russian regions. More specifically, we have decided to center on researching into convergence between Russia’s regions in terms of their social-economic development indicators. As well the research focuses on singling out components (alias the contribution of particular factors) of economic growth in the medium run.

The paper comprises four chapters and Conclusion. The first chapter provides a review of fundamental provisions and issues of the theory of regional economy that concern issues of regional growth and regional economic policies, among others. As well, the chapter contains a review of main papers on regional development published in Russia. The second chapter deals with the theory and main types of convergence, and empirical testing of various concepts of convergence. The testing is based on data of main socioeconomic performance indices of Russia’s Subjects.

Dneprovskaya, Drobyshevsky at al. (2002).

The third chapter forms the first attempt to decompose (break into components) economic growth in Russia’s regions and to assess differences in total factor productivity in the RF Subjects.

The fourth chapter highlights on Canada’s experiences in developing single regions and in the area of equalization.

Finally, the Conclusion provides economic policy recommendations.

1. Theoretical Fundamentals of Analysis of Regional Growth 1.1. Issues of Growth in the Theory of Regional Economy Regional economics4 constitutes a part of the economic theory that deals with differentiation and interrelation between various parts of a space in the condition of unevenly dispersed and imperfectly mobile resources. It focuses particularly on planning investment to smooth down various social problems. Regional economy originates from the theory of spatial interactions that in turn deals with studies into firms’ decisions on location of production and selection of a size and geographical position of markets. The task of placement of production operations in the space is closely linked to the problem of identification of an optimal output, technology and location of production, and the selection of a pricing mechanism.

An analysis of placement as a part of the regional theory shed the light on causes of emergence of certain kinds of production in different regions. However, the placement theory fails to provide an answer to more global questions that concern regional differences within regions. More specifically, why some regions see a steady rise in production operations, while other witness it fade gradually Region’s uneven development may become a consequence of differences in their geographical, social and economic positions. Different models of regional growth allow singling out factors that either encourage, or inhibit growth in some regions vis-vis others. The difference between regional models from traditional models of economic growth, as a rule, lies with the fact that the regional approach requires building multidimensional models, which can considerably complicate the receiving of certain conclu See: Nijkamp (1986).

sions. In some cases, multiregional models are reduced to a modeling of two regions: that is, a backward South and a more developed North.

1.1.1. Theory of Growth in Regional Economics The neoclassical approach to modeling of regional growth considers regions as production units, a equilibrium between which can be achieved by means of markets. The first neoclassical models explain an uneven development of regions with temporary deviations from the equilibrium or an imperfect adjustment in response to exogenous shocks. So, the differentiation should disappear in the long run. More advanced neoclassical models consider such phenomena as growing economies of scale and cutting-edge technologies, investments, and dynamic aspects of the models. While the neoclassical approach can be suitable for researching into regional effects, it suffers certain drawbacks, such as, for instance, overly strict prerequisites used to explain regional growth, an excessive focus on the processing sector and a relative ignorance of social and political factors5.

Harrod (1948) provides the simplest regional model of economic growth, albeit his conclusions can be applied to a closed economy isolated from the external world. To consider the openness of a given region, one may consider its economic and trade relations with the external world, assuming at the same time that parameters of the latter are preset exogenously, while the region in question is small enough to exert influence on the global parameters, such as, for instance, interest rates. The research into interregional relations may be carried out in the frame of a model that implies two and more regions. The most pictorial form of a modeling of interactions between two small regions may be represented by a Nijkamp (1986), p. 654.

model of two identical regions whose dynamics is described by a system of equations as follows:

In the case there exist such solutions to system (1.1) that xi & =xi, i=1,2, (1.2) one argues then that in a given economy, there exists a balanced growth equilibrium when growth in both regions is proportional in the long run.